Piraeus Bank S.A. (TPEIR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Piraeus Financial Holdings conference call to present and discuss the 2020 financial results and strategy updates. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Piraeus Financial Holding CEO, Mr. Christos Megalou. Mr. Megalou, you may now proceed.

Good afternoon, ladies and gentlemen, and good morning to those of you joining us from the U.S. I'm Christos Megalou, and I'm here today with Theodore Gnardellis, our group Chief Financial Officer; and Chrys Berbati, the Head of our Investor Relations and Group Planning. Thank you very much for attending our conference call. Today, along with our financial results for 2020, we are announcing a series of major transformational transactions that form the foundation of what Piraeus Bank is set to deliver in the years to come. Following significant effort by the Piraeus Bank team, we have now signed definitive documentation for certain corporate actions we have been pursuing over the past few months, which will decisively derisk our balance sheet, transform our profitability outlook and secure a solid capitalization for our bank. In addition to the actions undertaken, which will be formally completed in the coming quarters after receiving all the necessary approvals, we are calling an extraordinary general meeting for Piraeus shareholders to authorize the Board of Directors to proceed to a share capital increase of circa EUR 1 billion. Before delving into the details of the plan, let me stress the fact that our plan is a self-imposed strategic overall that will front-load our existing strategic agenda. We are becoming a legacy-free, strongly capitalized bank with a single objective to fund the Greek economic recovery from a position of strength and in a highly profitable capital-generative fashion. Starting with Slide 35, I want to emphasize that we are building on a solid base. We are the largest bank in Greece, serving approximately 60% of bankable customers through a widespread commercial network with consistent recognition for the quality of our services. We are and will remain at the forefront of market developments, including sustainable banking and digitization. Moving to Page 36, the bank's recent journey could be seen in several phases. Our corporate governance was revamped in 2016 and 2017. And later, during the 2018-2020 period, a number of important initiatives were launched to revitalize our bank. We accelerated the cleanup of our balance sheet. And in 2019, we established a long-term strategic partnership with Intrum for the management of our NPE stock. We have successfully navigated COVID-19, and we are proud to see our NPE stock and operating expenses declined considerably as compared to a starting point in early 2017. Going forward, we plan to transform Piraeus Bank even further by conducting a radical NPE cleanup in order to achieve a single-digit NPE ratio imminently within the next 12 months, and land to an NPE ratio of below 3% by 2024. On the back of a totally clean balance sheet, we have a precise, focused and decisive action plan that will allow us leveraging on very strong operating efficiencies and our leading market position to become a highly profitable and financially attractive institution. The Sunrise plan is a holistic transformation that front-loads the already existing strategy of our institution. NPE reduction is a fundamental pillar of our strategic plan. Further to the EUR 7 billion signed Hercules securitizations, Phoenix and Vega, we will dispose an additional EUR 12 billion of NPEs that will enable the achievement of a single-digit NPE ratio incorporating our expected inflows from the pandemic. To support this cleanup, a number of capital enhancement actions have been put in place with a total capital accumulation of circa EUR 2.6 billion, including circa EUR 1 billion from the upcoming share capital increase. Operationally, we have worked on a detailed restructuring plan aiming to boost pre-provision income and secure a recurring bottom line profitability, which ranks at par with the most profitable banks in Europe. Post the implementation of the Sunrise plan and in the medium term, we will have an NPE ratio of less than 3%, a capital ratio above 16% and double-digit return on tangible equity. Let's first look at our revised NPE reduction plan. On Slide 38, you can see a set of NPE disposals that will ultimately lead to a cumulative NPE reduction of approximately EUR 19 billion, including the HAPS-1 EUR 7 billion reduction related to Projects Phoenix and Vega, which are already signed and, of course, with their attachment points locked in. The key additional NPE reduction projects are Sunrise 1 and Sunrise 2, totaling a circa EUR 11 billion NPE reduction, which will be effected utilizing the upcoming expansion of the Hercules Asset Protection Scheme. Today, we are announcing the Sunrise 1 transaction, a EUR 7.2 billion securitization that is already in advanced status. The perimeter has been set, the recovery plan is locked in, and we have already secured the senior note size with a preliminary rating of the transaction, crystallizing the transactions consideration and resulting capital impact. This morning, we have applied for the inclusion of the transaction in the Hercules scheme and are immediately commencing mezzanine placement process. Sunrise 2 follows shortly and will achieve similar progress by the end of June 2021. Transaction consideration and capital impact are estimated and presented with conviction, given the bank's track record in over-delivering against its original assumption. In addition to the 4 Hercules projects, approximately EUR 1.5 billion of NPEs will be sold outside of the HAPS framework. The announced short-term NPE ratio target of less than 10% does take into account the relative turbulence resulting from the COVID-19 pandemic. Although inflows are indeed expected to be higher during this post moratoria year, a carefully planned outflow program will yield a largely neutral organic result for 2021. At the end of 2021 and taking into account our inorganic NPE reduction, we expect to land at circa EUR 3.6 billion NPE stock, mainly comprising of curable cases, newly formed NPEs and government-guaranteed exposures. Going forward, further derisking efforts will reduce our stock by an additional circa EUR 3 billion, aiming at achieving an NPE ratio below 3% in the medium term. Theo will provide further details on our NPE reduction plan shortly, as I'm sure there is going to be quite a few questions about the numbers, the timing and the overall implementation status of each of these transactions. To support our decisive cleanup, we are taking various capital-enhancing actions that we analyze in the second chapter of the Sunrise plan section of the presentation. In our Q3 results, we announced a capital enhancement program that will generate EUR 1 billion additional capital. This plan has now been fully implemented. On Slide 45, we outline the 3 relevant actions. Earlier this year, we realized approximately EUR 400 million profit from sovereign bond transactions. Last week, we signed the inaugural synthetic securitization of the [ grant ] with global investor Christofferson Robb & Company, CRC, securing credit loss protection for a performing loan portfolio of circa EUR 1.4 billion, which will reduce our risk-weighted assets by EUR 800 million. An additional EUR 1.2 billion risk-weighted asset reduction is expected by the second synthetic securitization deal that will be concluded in the coming quarters. And finally, earlier today, we signed a definitive agreement for the sale of our merchant acquiring business to Euronet Worldwide and locked in a EUR 300 million cash consideration as well as a long-term partnership that will generate commencing our opportunities for both parties. The consideration corresponds to circa 15x the business EBITDA while the satisfactory level. On Slide 46, you can see the timeline for the equity raise we are planning to execute in the coming weeks. It will have the form of a non preemptive capital increase of circa EUR 1 billion and will be implemented in April following the necessary approvals. Our main shareholder, HFSF, who became majority shareholder of the bank post the conversion of the CoCo earlier this year, it tends to fully support the capital increase and is willing to reduce its participation below the blocking minority shareholding. Following the equity raise and always guided by the market sentiment, we are planning to tap the market for the issuance of approximately EUR 600 million additional Tier 1 capital. Bringing everything together on Slide 47, the equity raise and the other capital enhancement actions are estimated to contribute circa 7 percentage points to our capital ratio, increasing it to roughly 22.5% on a pro forma basis. These measures will provide us a sufficient buffer to absorb the losses stemming from the NPE cleanup and will allow us to maintain a solid total capital ratio of circa 16% in the medium term, ensuring that the bank comfortably exceeds its capital requirements as presented on Page 48. Turning to the last chapter of the Sunrise section of the presentation, we focus on the key elements of our transformational plan to improve our profitability in the coming years. Our short- and medium-term targets are illustrated on Slide 50. We have done very detailed work, and we very confidently believe the targets we are setting today are highly plausible. As presented on Slide 51, our forward-looking plan enables a circa 15% pre-provision profit boost by 2024 through top line growth from new healthy business, enhancement of our product offering, efficiency improvements, a radical transformation of our cost base and focus on digitization, cumulatively resulting in a circa EUR 1.1 billion recurring pre-provision profit in the medium term. Combined with a carefully managed and growing pre-provision profit, the post cleanup, the escalated cost of risk and reduced servicing costs are expected to deliver immediate returns to the shareholders that will increase to reach double-digit levels in the medium term. Theo will cover our forward-looking P&L buildup in further detail during our Q&A session. Our financial targets are summarized on Slide 61. The new Piraeus Bank will imminently become a less than 10% NPE ratio bank, with a medium-term target of less than 3% and this will be achieved with capital levels exceeding 16%, while our totally restored balance sheet will be generating returns in excess of 10% in the medium term. Section 3 of our presentation illustrates some of our achievements and ongoing actions regarding the incorporation of ESG factors into our business. All stakeholders, including investors, customers, but most importantly, the overall communities we operate in are expecting a lot from us on that front. And we are fully dedicated to meeting their expectations and be at the very forefront of this very important and evolving topic of our overall strategic agenda. Concluding my presentation today, I would like to emphasize that today's announcement makes us all very excited for what lies ahead for Piraeus Bank. We are entering a period of macroeconomic normality, and we want to start from a leading position of strength, leveraging on our premier positioning in the Greek banking market. The Sunrise plan is pivotal in achieving our aspiration to accelerate our full cleanup and become a derisked, efficient and highly profitable bank, benefiting our clients, generating sustainable returns for our shareholders and creating value for the wider stakeholder community. And with that remark, I would like to open the floor to your questions.

[Operator Instructions] The first question is from the line of Floriani, Jonas with Axia Ventures.

So my first question is on capital. So as far as I understand, there's no more room for Tier 2 issuance, right? And any capital -- nondilutive capital action will be done via the AT1. Also, on the same topic, given that your competitor had mentioned opening the discussions -- potential -- possible discussions for dividends after 2022, just wondering if this is something that is also part of your plan. Then my second question is on coverage. I don't know if I missed on the presentation, but I'm just wondering what kind of, let's say, over-the-cycle coverage level, we should expect you guys to report after the de-risking is done. And then my final question is on your MREL plan. I see that you have on Slide 52, the EUR 30 million impact on NII. I'm just wondering what is the level -- to what level that EUR 30 million refer to in the coming years?

Jonas, so first question. Indeed, the nondilutive capital that we will be issuing is AT1. The Tier 2 has indeed been covered. And from -- they would use our WA trajectory. Now it's actually fully covered. There was some buffer before that we had mentioned, but with the new cleanup, indeed, there's no more room for Tier 2. AT1 will be the upcoming issuance. On dividends, obviously, the bank is guiding for a strong profitability in the medium term. Realistically, for Piraeus Bank, this will happen post the IFRS phasing is completed in 2023, at which point, the strong profitability from '24 onwards, will provide room for above-average dividends. In terms of coverage levels. Immediately and in the short term, we would similar coverage levels as the ones that we have today, so around the mid-40s. Then on, this will gradually escalate so that in the medium term, we will reach coverage levels of around 100%. And regarding the MREL target. Our medium-term MREL target towards the end of 2025 is in around 25% to 26%. We will be gradually covering that over the coming years with senior bond issuances. And obviously, the AT1 will also contribute to this target, so that we can gradually reach those levels, and this is incorporated in the plan.

The next question is from the line of Cunningham, Corinne with Autonomous Research.

A question firstly on AT1. The timing on that, is that going to be after the rights issue? And would that be supported by the HFSF as well as the rights issue, or will this be a pure market deal? And then I had another couple of follow-up questions, please.

Corinne, the timing of the AT1 issuance will really depend on market conditions. It does not have to happen before nor it doesn't need to happen afterwards. It will happen over the coming period, depending on market opportunities. We believe that as soon as the plan crystalizes, the right conditions will be in place in the market for us to proceed with that issuance. And to the second part of your question, this will be a fully market offering.

And on the securitization that you're preparing, do you still see in the market strong appetite from mezzanine debt? Or will this be a partial spin-off to shareholders?

The placement strategy for the mezzanine and junior tranches has not been finalized yet. All options are open. We are very proud of the way that we concluded the Phoenix and Vega transactions. But in terms of demand, let me just remind you that these mezz tranches actually go for quite [ thin ] considerations. So for us to crystalize the capital impact, what was very important and what we have achieved is to finalize and have very good estimates on the senior notes sizes. At some point, soon enough, we'll be able to place the mezz notes in accordance with the HAPS law and achieving, therefore, significant risk transfer.

And then last question. I see that you still kind of refer to the combined buffer as being sort of part of your usable capital, so available capital right now. Is it something you actually expect to do to dip into the combined buffer? Or are you literally just reflecting on that slide, the fact that it's possible even if it's not necessarily in your plans?

We are aware of the tolerance and the relief that has been given on these buffers, and that's why we mentioned them in the material. The plan, however, is not dependent on us going into those buffers and actually calculate capital levels above OCR at every point in time.

[Operator Instructions] The next question is from the line of Nigro, Alberto with Mediobanca.

The first one is on NII. You are targeting EUR 350 million additional NII from the performing loans. Can you give us the assumptions on loan growth rate, and if this number includes also the TLTRO positive impact in the coming years? On cost, can you give us more details on the timing of the cost savings on Slide 54? And also, I saw that you booked EUR 147 million this quarter. What covers this amount of restructuring costs? And if we need to expect other additional restructuring cost in the coming months? And the last one, can you give us more detail on how moratoria evolving in these 3 months of 2021?

Alberto, so in terms of your question on NII, the assumptions are really depicted on Page 52, where we're showing that performing exposures will deliver EUR 300 million extra interest income over the coming 4-year period. It really assumes a EUR 10 billion cumulative credit expansion over the coming 4 years at slightly lower rates to what we have today as a result of the mix. This, I have to say, does not take into account the TLTRO because in terms of the way that we accrue for TLTRO, we are still accruing it at negative 50 basis points. So years '21 and '22 will benefit from one-off gains from the enhanced total returns at minus 1%. So that will basically defend the NII levels of '21 and '22, while the performing exposures are kicking in to step up the overall interest income that you see on this page, on Page 22. In terms of the timing for cost, it's really a gradual drop that we will be seeing on all lines of costs. We saw a substantial reduction of cost levels, like-for-like on all lines already in 2020. This trajectory is expected to continue throughout the upcoming 3-year period. In terms of [ VS ] cost, and thank you for the question. The charge that we've got incorporated into the 2020 P&L has also generated a reserve of over $50 million that we will be using for future restructuring costs. So it is -- the actual cost for the reduction that we have done on staff in 2020 is actually below EUR 100 million. And in terms of moratoria, we have stepped up the disclosure in this result, and we are illustrating how the moratoria have evolved. The fact is that moratoria is -- last year is really phenomenal and most of them have already expired. Our current active moratoria is something above EUR 1 billion. You can see also the evolution of the moratoria, how they expired on Page 28. So far, some of the early expiry vintages have already generated some first NPEs. The current conversion level is at around 5% as we're seeing on Page 29. So out of the EUR 1 billion total NPE flows from moratoria, around $200 million are already incorporated in the 2020 numbers, and we expect another EUR 800 million to happen over the coming period, as we're showing on Page 30.

The next question is from the line of Sevim, Mehmet with JPMorgan.

Congratulations on the many substantial steps you're taking to accelerate the transformation process. I will have just a few quick questions, please. First of all, would you be able to guide for an accounting impact coming from Sunrise 1 and 2 already at this stage? Or do you think it's reasonable if you take something pro rata along the lines of Vega and Phoenix together as you've done last year? And secondly, just from an accounting perspective, as a clarification for myself, given you've done the hive-down already in 2020, would there be any implication of printing a negative bottom line in 2021 as well, just from a timing perspective? And finally, in terms of the capital raise, is there anything you can share with us already in terms of the time line? And any other details? Any initial interest from investors, et cetera, at this stage? I appreciate it may be early, but just asking and double checking.

Mehmet, the expected loss for Sunrise 1 and Sunrise 2 are similar levels to what we also saw for Phoenix and Vega. It's -- from the first transaction, having secured the senior note size, it is pretty much around the 20%-mark losses against GBV that we are expecting. And this is what the capital impact that we are showing is based upon. So Sunrise 1 and Sunrise 2 will have a 4-percentage point capital impact in proportion similar to what we've seen for Phoenix and Vega. In terms of the accounting treatment and the hive-down structure. The structure that we have put together for these post hive-down securitizations, as we have come to internally call them, is such that it does not generate a P&L impact at the bank level -- the P&L impact even post hive-down with the accounting structure that we have put together, happens at the holding level. And this is something that has been secured with all relevant stakeholders. And Mehmet, as to the ambitious time line for the share capital increase, we will hold an AGM to authorize our Board to approve the equity offering on the 7th of April. This was decided today by our Board. We would expect to have prospectus for the equity offering approved by the Capital Markets Committee in Greece by mid-April and proceed with a book-building exercise by mid-April. The new shares, we expect will start trading by early May. That's the time line.

The next question is from the line of Memisoglu, Osman with Ambrosia Capital.

Congrats on your plans. The -- maybe I missed it. The organic NPE development in 2021, when all's said and done, are you expecting a neutral impact? That's my first question. And then the second one is, the one-offs in Q4 '20, were they only [ VS ] related? I wanted to confirm that. And then if you could give us just broad assumptions behind all these estimates you're providing, anything on macro, real estate prices, if you could give us any color on that, that would be appreciated.

Okay. So the organic NPE flows, they basically do guide for a neutral result, excluding write-offs. We can see them on Page 42. It is an estimate of -- it includes an estimate of EUR 1.7 billion of inflows this year, which is substantially higher to last year, of course, as a result of moratoria inflows that we're expecting. And also outflows have been carefully designed in context of the current legacy stock that we have. Obviously, in putting together the securitization perimeters, we have been quite diligent in figuring out the imminently durable exposures and making sure that the bank takes benefit of those in its organic result. So yes, reduced exposures because of primarily reduced liquidations in 2021 versus 2020, but good enough so that they can even out the increased inflows. In combination with write-offs, this is what guides for a EUR 1 billion negative organic result this year to allow us to achieve the single-digit ratio after the transactions at hand. Now to your question about macros. Obviously, this is a very -- this is a story on the back of the expected macro recovery of the country in the post-COVID era. The actual numbers of macro assumptions show for strong mid-single-digit GDP growth year-on-year and similar expectations for real estate. That being said, the plan is not, though, dependent on the actual numbers of the recovery and its actual pace. The 2 major elements that have been affecting such plans in the past: one is the credit expansion and the other one is the inherent real estate value. Credit expansion assumptions right now in the plan is what we are already seeing, so nothing extravagant versus current our observations. And the real estate price trajectory becomes less relevant as the bank relieves itself of its NPEs, i.e. collateral-based valued assets. So the plan really depends on a healthy recovery, the actual numbers of which there's flexibility on.

And on the Q4 one-offs, was it all [ VS ] related, just wanted to confirm?

The -- they are basically around particular exposures that we decided to adjust our marks as well as the first wave of COVID inflow that we have seen. Let's also remember that 2020 was a hive-down year for Piraeus. So in view of the upcoming NPE cleanup, beyond the securitizations, it was also an opportunity for us to take a more conservative view towards the marks of exposures to be sold.

The next question is from the line of Sharma, Drishti with JPMorgan.

A very quick one from me. With regards to the equity raise, you mentioned that the HFSF agreed that they are going to be backing it and will be participating to reduce that stake. Can I just double check and confirm that their considerations have been taken into account there? Just with their participation that will help the [ management ].

Back in November 2020, HFSF has made a public statement and publicly communicated that it is fully supporting any capital action that may or may not happen, but as well communicated that it's willing to reduce its participation to Piraeus Bank to a nonblocking minorities share holding. As far as the fully marketed offer is concerned, we are -- we gave you the time line as before. So we are expecting a mid-April execution of the book-building process, and that will include also a Greek offer, which will have also a retail and Greek institutional demand. We expect that for the offerings, a priority allocation will be considered by our Board of Directors for all the investors that are -- will be participating in both offerings.

The next question is from the line of Cordara, Alberto with Bank of America.

For me, some clarifications. On Slide 38, is it possible that you break down the different impacts in terms of lower risk-weighted assets and equity loss? And then the second question is, I see that your return on tangible equity goes from 5% in the short term to 10% in the long term. So this is quite a big jump; you're doubling up your return on tangible equity. So can you give us a better idea of which year we should take as a reference as a short term, and which year should we take as a reference as long term? And then another question on your slide, when you showed that you land at card of 60%, this is also helped by the AT1. In terms of -- if we look at your target in terms of common equity fully loaded, what do you expect to reach in '21, '22 and potentially also in the long term in '24, let's say?

Okay, Alberto. So impact on the securitizations. The Sunrise 1 and Sunrise 2, combined, will generate a P&L effect of approximately EUR 2.3 billion loss and will relieve of approximately EUR 6.6 billion of RWAs. And this is what calculates to the capital impact, where we're giving you this disclosure so that you can also calculate in terms of a percentage of GBV. As said before, something very close to 20%, as have been the previous securitizations that we did. Short term, long-term reference. Short term is really something within the next 12 months. So something that looks like '21 or rather '22. Long term is -- -- sorry, medium term is post-IFRS basis. So we're really talking about 2024. The enhancement of the ROE is explained on a PPI basis in the current presentation and also supported by the reduction of the cost of risk to normalized levels of around 70 basis points. In terms of a fully loaded CET1 capital, it will be around the 8 to 9 percentage points fully loaded immediately. That being said -- and then eventually, in the medium term, it exceeds the 12% mark. The plan's inherent assumption is that, and this is also the case for 2021, is that the organic capital generation is the one that really pays for IFRS phasing. So every year, the trend is for the phased in number to approximate fully loaded number. So when one takes into consideration this plan, it's really a matter of taking into consideration the profitability. We are leveraging the shareholders at the right level, so as to provide also the right returns.

The next question is a follow-up question from the line of Nigro, Alberto with Mediobanca.

Yes. Just a follow-up. One clarification on cost of risk in Q4. You anticipated some provisions that you said for becoming the NPE securitization. Can we know how much the amount? And if this will reduce the impact on capital from the NPE securitization that you are doing in Q1 and Q2?

Alberto, thank you for the follow up. The fact is that this charge that we have taken on the back of NPE cleanup and also additional COVID inflows is not directly relevant to the securitizations, but more so to other exposures that we intend to dispose of during the year 2021. The securitizations in terms of impact to the solo account will not incur any P&L. As a result, the focus was mostly on other exposures that we intend imminently to dispose of.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Megalou for any closing comments. Thank you.

Thank you, all, for participating in our 2020 results and strategy update conference call. As of tomorrow, we'll start an extensive program to meet investors and discuss in detail our new strategy and the Sunrise plan. We look forward to speaking with you in person in the following days. In the meantime, stay all safe and healthy.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and you have a pleasant evening.